Hospitals, smaller rivals square off

November 10, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

With momentum for health reform building, Maryland hospitals are squaring off against managed-care companies in a struggle that will determine how health care is delivered in the state.

The looming battle is an outgrowth of marketplace pressures that began mounting as a result of spiraling health care costs and anticipation of the Clinton administration's health care reform plan, unveiled last month.

Arrayed on one side are those favoring an incremental evolution of the hospital regulatory system.

These forces include hospitals that are rapidly losing business.

On the other are managed health care companies with deep pockets, doctors anxious to make sure they are not cut out of the developing market and a few Baltimore hospitals frustrated by current rules.

At the heart of the issue is the state's unique regulatory system, which was designed at a time when the only competition hospitals faced was from each other. The system tightly regulates hospital rates. In exchange, hospitals are allowed to spread the cost of care for the uninsured among paying patients.

The system has won Maryland the only exception in the country from federal Medicare payment schedules, which means the federal program picks up the state's share of the cost of care for the uninsured and helps hospitals with a high percentage of uninsured patients stay competitive. The federal payment is estimated at $200 million a year.

But now, the $4-billion-a-year state hospital industry is under assault as care moves outside hospital walls -- and outside the purview of the state's Health Service Cost Review Commission. As a result, the Maryland hospital system can't compete with alternative purveyors of medical care, from home care companies to a Dallas-based company that can send mobile operating vans to doctors' offices on 24 hours' notice.

The way medical care is delivered in Maryland began to shift in earnest last year, when more employers demanded managed care for their workers as a way of controlling costs. Enrollment in health maintenance organizations rose at an annualized rate of 7 percent in the first quarter of 1993 alone, and hospital occupancy dropped nearly proportionately in the spring and summer.

At least six hospitals laid off workers.

Already, hospitals are looking for ways to stem the loss of patients to unregulated, cheaper services. Many of these upstart businesses, particularly single-specialty physicians' practices that can deliver hospital-quality surgery in their own offices, don't require a license and generally are outside the control of cost regulators.

Several hospitals, rather than watch their doctors and ancillary medical businesses lose patients, have set up their own managed-care systems by skirting regulatory rules.

And the Maryland Hospital Association has been working furiously on what state Del. Casper R. Taylor Jr., D-Allegany County, who chairs the House Economic Matters Committee, described as a "monumental reform."

The biggest health care battle of the season is likely to be over whether hospitals should be allowed to discount outpatient services in order to compete for managed-care contracts or, conversely, whether the freestanding outpatient centers now winning that business should be forced under the regulation umbrella. The former would undermine the current hospital regulation system, and the latter would drive up prices, an option sure to draw the ire of the state's employers, who pay the bills.

The MHA is working on a proposal that would likely call for widening the regulatory net over the marketplace. That doesn't sit well with some of the hospitals' competitors,which argue that the current system is protecting the inefficient.

"The reaction from the hospital industry has been, 'Rather than free up regulation, let's have more. Let's extend regulation to all outpatient centers,' " said Gerard E. Evans, a lawyer and lobbyist who represents managed-care companies. "To me, that is not an answer."

New players, including companies that are building regional or national bases, are challenging the established order. Mr. Evans has been signed on by one of them, U.S. Healthcare Inc., a Philadelphia health maintenance organization that in less than a year has signed up 8,000 members in Maryland. This company and others, notably Mid Atlantic Health Service Inc., owner of the popular M.D. IPA plan, bypass hospitals whenever possible.

Small players, too, could have a big influence in the debate because of their influence in the market. The Baltimore-based Chesapeake Health Plan, which nearly declared bankruptcy a few years back, today is one of the state's fastest-growing managed-care companies and has rebuilt on its expertise with Medicaid patients. It recently won an important federal Medicare contract, too, and could take business from bigger companies as it develops its specialty. It relies on freestanding surgery centers, including one owned by its parent company.

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